OVERVIEW

Broad money supply growth increased slightly in April, rising by 6.0% from 5.9%, whilst loans growth moderated to 10.0% from 10.2% previously. Macroprudential measures and inflationary pressures continue to put a damper on loans and spending.

However, this is expected to make a rebound in the second half of the year whence prices begin to normalize, taking off pressure from BNM to increase interest rates. For now, rates remain supportive of the economy.

- Money supply in circulation expanded in April albeit slightly, with M3 edging up to 6.0% YoY from 5.9% in March. M2 retained its pace of a 6.3% gorwth whilst M1’s growth moderated slightly to 11.3% from 11.4%. Year-to-date, overall money supply increased by 2.0% compared to 3.5% seen in the same period in 2013.

- The main factor behind broad money expansion is the 56.8% (March:33.3%) rise in the net claims on government. However, claims on the private sector remained at 9.9%, exuding proof that spending still remains somewhat muted on account on higher inflation. Growth in the net foreign assets on the other hand fell by 2.5%, following a 0.6% rise previously. We do not think this fall in net foreing assets will be a trend moving forward as net foreign outflows have already begun to subside and following the better than expected economic growth in the 1Q14, Malaysian assests are even more favourable.

- More recently, foreigners have been net buyers in the financial market for over 20 consecutive days, with the Fed continuing to reduce its bond and asset purchases (currently at US$45b) and expected to maintian its pace of US$10b each time. There could possibly be another surge in inflows in the near future (similar to the situation with the introduction of QE) if the European Central

 Bank decides to introduce a stimulus package to boost lending and spending as Eurozone battles against the threat of deflation. There’s also the possibility of another interest rate cut from 0.25% to 0.15% to encourage business lending. It is also expected to cut interest rate it pays to banks that keeps funds on deposit in a further move to discourage lenders from hoarding cash. This would further prompt flows into countries like Malaysia, solely on rate differential alone.

- Nevertheless, financials worldwide are dependant on the state of the economy. Despite the 1.0% fall in the US economy, the blame was largely on account of unusually cold and distruptive winter, plunging business investment. This backlog is expected to pick up strong in the following quarters. The service sector continues to expand (flash PMI in May rose to 58.4 from 55.0 in April) and manufacturing remains steady (PMI at 3-month high of 56.2 in May). In China, manufacturing is seen rebounding (official PMI at 5-month high at 50.8) on targeted measures announced by the government to aid the economy, which moderated to an 18-month low in the 1Q14. However, the HSBC/Market PMI which favours smaller and private companies still remains below the expansion level.

- Meanwhile, loans growth in April increased by 10.0% YoY, slightly slower pace than the 10.2% seen in the previous month. Similarly, on a monthly comparsion, loans growth moderated to 0.4% MoM from 0.5% previously. Pace remains sedate as macrodential measures continues reign in household debt and speculation in the property market.

- In detail, there was a 17.6% increase in loans for the purchase of securities, slight moderation from 19.5%. Notably, loans for the purchase of consumer durable remains strong, increasing by 251.3% (March: 226.6%). Loans for the purpose of purchasing residential property remained at the same pace of 13.6% whilst loans to purchase passenger cars moderated further to 4.7% from 4.9%. On the business end, loans for the purpose of working capital moderated to 7.7% (March: 7.9%) whilst for the use of constrution retained its 14.0% pace.

- On a sector basis, loans for financing, insurance and business services moderated to 9.7% from 15.% in March whilst the manufacturing sector saw a rise of 3.1% growth (March: 1.4%). Loans towards wholesale, retail, restaurants and hotels saw a slight moderation of 5.5%, (March: 5.6%) and loans in the mining sector increased by 35.3% from 20.3%. The loans towards electricity, gas and water supply remains unsurprisingly high, increasing by 46.2% (March: 46.7%) on account of an increased in the electricity tariff that came into effect in January. Loans to the household sector moderated slightly to 11.6% from 11.7% previously.

Outlook

- On account of continued commitment to reduce household debt and reduce deficit, credit growth would remain somewhat subdued this year. Inflationary pressures continues to damper spending, especially the household and consumer sectors but should begin to alleviate in the later part of the year, when prices start to normalize, which may take off some pressure from BNM to raise interest rates this year. 

Source: Kenanga